Booming North American oil supply boosts regional refining profits

A growing influx of cheap, North American-produced oil once
again lifted the profits of refiners Valero Energy and Marathon
Petroleum, as the companies said they expected even more
domestic crude to reach their gates in the near term.

Valero's intake of light, sweet crude, most of it produced
in the US, reached an all-time high of 1 million bpd in the
first quarter, up 25% from the year before. That helped the San
Antonio refiner beat expectations with a profit of $654
million, or $1.18/share, versus a loss of $432 million a year
earlier. Analysts polled by Thomson Reuters had most
recently forecast earnings of $1/share on revenue of $30.41
billion.

Meanwhile,
Marathon Petroleum earnings rose 22% to $725 million, as the
company's new Galveston Bay refinery, which it bought from BP in
February, added to its sales volumes.

The results underscore how US refiners continue to benefit
from the booming activity unleashed in the US and Canada by
hydraulic fracturing and massive investment in the oil
sands.

The unexpected geological bounty keeps being revised upward,
promising ample supplies for refiners for years to come; the US
Geological Survey on Tuesday doubled its estimate of how much
technically recoverable oil was lying in ground in the Bakken
Shale, an oil-rich formation in North Dakota, South Dakota and
Montana, to 7.4 billion bbl.

The industry's recent good fortunes mark a departure from
the immediate aftermath of the 2008 financial crisis, in which
refiners' profits cratered amid a combination of stagnating
fuel demand and the high cost of imported crude. Some analysts
think the effect might be long lasting; Morningstar analyst
Allen Good said the inpouring of domestic crude would dampen
the historical volatility of refining profits, and even if
profits moderate in the future, there will be less chance for
out-and-out losses.

"We're in the early innings of this," Mr. Good said.

Still, others are worried that refiners won't be able to
sustain the profit levels shown in the first quarter,
especially if an improving transportation network wipes out the
discount seen in much US-extracted crude, which is the result
of localized gluts. Because some US coastal refiners rely on
imported crude from overseas, the price of fuel is set by
international oil prices, and refiners with access to domestic
crude pocket the difference.

But US benchmark oil prices are already inching closer to
global prices: on Tuesday, the premium traders paid for European benchmark Brent versus its
US counterpart shrank to its narrowest level since December
2011, at $8.91/bbl. Edward Jones analyst Brian Youngberg said
that the shrinking gap helped put pressure on refiner shares
despite the increase in earnings: Valero shares were trading at
$40.09, down 2.7%, and Marathon Petroleum shares were down 5.4%
at $77.98.

"The general concern is that the first quarter was a peak
and we'll see earnings pull back in the next couple of
quarters," said Brian Youngberg, senior energy analyst at
Edward Jones.

Nevertheless, refiners are investing in their capacity to
handle the US oil boom. Valero plans to spend about $500
million to increase the amount of domestically produced light,
sweet crude at its Houston and Corpus Christi refineries by a
combined 160,000 bpd. It will also raise the amount of US oil
it ships to its 265,000-bpd refinery in Quebec; by the end of
the year, the refinery will no longer need to import crude from
outside of North America, Valero CEO Bill Klesse said.

Access to discounted oil, plus strong diesel and jet fuel
sales, helped drive operating income at Valero's Midwest
refineries to $12.49/bbl, almost double what it was a year ago.
Operating margins swung to a positive 3.2% from negative 0.7%
the year before, helping to offset flat fuel demand in the US,
which is still struggling to shake up a lethargic economy.

Houston-based Marathon expects to process more cheap US
crude at its Galveston Bay refinery as pipelines are built out
to help crude from areas like the Permian basin in west Texas
make its way to Gulf Coast at attractive prices, said Mike
Palmer, the company's senior vice president of supply
distribution.

The combination of falling oil prices and stagnant fuel
demand should help bring relief to drivers. Travel association
AAA said it expects US gasoline prices this summer to average
as low as $3.20/gal for unleaded regular. A gallon of regular
costs an average of $3.50 on Tuesday, down from $3.82 a year
ago, according to AAA Fuel Gauge.

"Gas prices in much of the country have declined this spring
because of lower oil costs, ample refinery production and continued
weak demand," said AAA spokesman Avery Ash.

Dow Jones Newswires

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